• New Jersey patients spent almost three times as many days in the hospital as patients in Utah.
• Patients in Manhattan had 3½ times as many hospital days as patients in Bend, Oregon.
• Among teaching hospitals, the variation in the amount spent was more than four to one.

So what impact did this wide variation in care have on the health of patients?  Not a whit. 

• There is no evidence that extra care and extra spending produce better outcomes, and some evidence that they produce worse outcomes.
• Further, variations in care correlate with variations in supply: the more hospital beds, the more bed days; the more CT scanners, the more scans; the more cardiologists, the more cardiac care, etc. [See Associated Press article ]

Is this the whole story?  I'll shelve that question for another day.  For the moment, what do we make of all this? 

Before anyone launches into another bash-the-American-health-care-system tirade, be forewarned.  Researchers have found wide variations in medical practice from doctor to doctor, town to town, region to region – all over the world.  The type of health care system doesn't seem to matter very much. 

So what's going on?  I'll start with the conventional theory.  Then add four of my own. 

1.  The Venal-Mercenary-Doctor Theory.  The conventional theory is "supply induced demand."  Providers convince patients to want whatever health resources are available.  Why would they do that?  Fee-for-service payment is often blamed.  Providers make more money if they can convince patients to demand unnecessary care. 

Anyone who has spent much time around doctors will recognize this theory as mainly poppycock. 

2.  The Doctor-as-Altruistic-Agent-of-the-Patient Theory.  In case anyone hasn't noticed, we have made health care free (or almost free) to patients all over the developed world.  Now if you were a physician advising patients and the perceived cost of virtually every resource was zero, what advice would you give?  It's a no-brainer:  Use every resource in sight as long as there is some marginal benefit, no matter how small.  With willing patients, the only thing restraining usage will be limits on supply and the occasional (managed care) limit on demand. 

3.  The Patients-Acting-as-Their-Own-Doctors Theory.  Who needs doctors to induce demand?  Any curious soul armed with a computer can find all kinds of ways to spend (other people's) health care dollars for his or her own benefit.  In fact, 113 million people have searched the Internet for health information. [link] 

4.  The Misguided-Donor/Misguided-Legislator Theory.  Why do resources differ from place to place?  It usually comes down to arbitrary decisions by donors and politicians (far removed from real patients).  Suppose a donor pays for an MRI scanner and also pays for the technical staff and the radiologists.  Treating these costs as fixed, the marginal cost of a scan is almost zero.  So it makes sense to run the scanner around the clock.  If a second scanner becomes available, it makes sense to run that one around the clock as well.  Ditto for the third.  And the fourth.  You can do an awful lot of scanning before the marginal benefit gets all the way to zero. 

5.  The Medicine-As-Art-Rather-Than-Science Theory.  Imagine three ways of approaching your job.  First, as an artist – relying on experience and judgment but also wafting wherever the spirit moves you, with no bad consequences.  Second, as a business manager – being forced to compare profit and loss on every decision with bankruptcy always a threat.  Third, as a scientist – being constantly under the scrutiny of your colleagues, with professional reputation hanging in the balance. 

Our system (and, indeed, the health systems of all developed countries) gives doctors the freedom to choose approach number one. 

Years ago, a RAND study found widespread variation of medical practice and concluded that one-third of all care was unnecessary.  Yet as explained in Patient Power and again in Lives at Risk [hot link], even among RAND's expert panels there were wide differences of opinion.  Absent economic and scientific pressure, conformity of treatment modes is unlikely to ever occur in medicine. 

Bottom Line.  I believe theories 2, 3, 4 and 5 explain 80% to 90% of everything we observe, while the conventional explanation (theory 1) explains a small part of the remainder.  Wide variation in the use of health care resources is not a surprise.  It is the natural and inevitable consequence of a system in which normal market forces have been systematically suppressed and nobody ever faces a real price for anything. 

Have a great day.

John

Consumption by worthless heirs creates positive externalities for the rest of us. Remove the idle rich and most of Manhattan's finest restaurants would have to close. There would be half as many Broadway shows. Granted, the cost of a pied-a-terre in New York City would probably be a third of its current price. But what's the point of having a Manhattan condo if there's nothing to do once you get there?

By contrast, the estate tax encourages people like Buffet to leave their fortunes to foundations, which can create negative externalities as well as positive ones. Conceivably, such gifts can do more harm than good.

What brings all of this to mind is a Commonwealth Fund study which claims people feel "financial stress" if their health expenditures exceed 10% of income (5% if you're poor), and measures the amount of stress people endure from community to community . . . (pause to take that in) . . . . I'm not kidding. They actually did this.

[Note to Reader: The remainder of Dr. Goodman's views on this study have been deleted by the NCPA's internal editorial censor on the grounds that they were lacking in taste and grace. There was also an objection lodged against paragraphs 2 and 3 above, but we decided to let them slide.]

Here are the ABCs of health care finance:

1. The nation is spending 16% of its national income on health care – not 5%; not 10%; but 16%.
2. A better measure, however, is health care consumption as a percent of personal income. On this basis, the average household is spending more than 17% of its income on health care.
3. Better still is to focus just on consumption. The average household is spending 19% (almost one out of every five) of all its consumption dollars on health care!

Some people are above the average; others are below it. Seniors, for example spend more than 40% of their consumption on health care. For people over age 75, it averages more than half!

Are these senior citizens maxing out on the stress-o-meter? I have no idea. But given Commonwealth's constant reminders of how wasteful the whole system is, here is a statistic that may warrant scrutiny: For every dollar we spend on our own health care, we are spending close to another dollar on someone else's health care, thanks to the taxing power of the state!

In dollars and cents, health care consumption equals $6,342 per person, or $16,300 for an average size household. However, of that amount more than $7,000 goes to pay for other people's care.

Is the money the government is taking out of your income to spend (wastefully, as fate would have it) on other people putting you in a financial bind? The very thought of it stresses me out.

Have a Merry Christmas

John

P.S. This is my last Alert for the holiday season. On January 3, I will solve all of the nation's most important health care problems in no more than six pages – just in time for the Iowa caucuses.

For the Commonwealth Fund study of financial stress go to: http://www.commonwealthfund.org/usr_doc/Cunningham_overburdenedoverwhelmed_1073_ib.pdf?section=4039

For the NCPA's study on health care consumption by the elderly, go to: http://www.ncpa.org/pub/st/st297/